The real fact questions arise under §363(h)(3), weighing the benefits to the estate versus the detriments to the nondebtor co-owner. The benefits to the estate are usually clear, although the cost of getting the benefits is relevant. The detriment to the co-owner(s) takes various forms, and the case results vary because they are very fact-sensitive. Below are some representative case summaries examining these issues.

Cases Approving Sales

In re Rozwick, 231 B.R. 843 (Bankr. S.D.N.Y. 1999). This case involved the proposed sale under §363(h) of property owned by a debtor bankruptcy attorney and his nondebtor spouse. The court stated that "once the trustee makes a 'prima facie case demonstrating that the estate would benefit from the sale of the residence, the burden shifts [to the nondebtor co-owner] to show facts indicating why the sale should not be approved.'" (quoting In re Grabowski, 137 B.R. 1, 3 (Bankr. S.D.N.Y. 1992). The apartment in this case was located in an exclusive area of Manhattan and had a fair market value of $1,050,000. The nondebtor co-owner would receive at least $311,000 as a result of the sale of the property. The nondebtor co-owner testified that she would be unable to purchase a similar home in the same neighborhood for $300,000. The court weighed noneconomic detriment against any benefits to the estate in its analysis under §363(h)(3). The nondebtor spouse asserted that:

• a sale would allegedly make her "ill and devastated;" she would not be able to obtain housing in the same neighborhood at the same standard of living;
• she had an important relationship with the Rabbi at the local synagogue that would be broken if she were forced to move;
• success in her career as a real estate broker as she was dependent on her familiarity with the neighborhood in which the apartment was currently located;
• she had an emotional attachment to the apartment because it was where her family and friends celebrated holidays and celebrations; and
• it was the only home her children had ever known and she would suffer emotional trauma if forced to move from the apartment.

The court held that a certain amount of inconvenience ordinarily accompanies a change in one's residence and that a "nondebtor must demonstrate some extraordinary circumstance, other than inconvenience or emotional attachment, in order to frustrate the trustee's attempt to sell property." The court held that the nondebtor in this case did not make the requisite showing. The trustee showed a benefit to the estate of approximately $311,266.97, and the sale was approved.

In re Oswald, 90 B.R. 218 (Bankr. N.D. W.Va. 1988), is a case where the trustee sought to sell real estate owned by a debtor and his nondebtor spouse in joint tenancy. The court analyzed the exact interest that the estate held as a matter of state law, including a joint tenant's right to partition. Under state law, "a judicial sale may be made, but only if (1) the interests of one or more who are entitled to the real estate will be promoted by a sale of the entire parcel, and (2) the interest of the other person or persons so entitled will not be prejudiced thereby." In determining whether the nondebtor spouse would be prejudiced by a forced sale, the court examined almost exclusively economic factors. The court found the nondebtor spouse would not be prejudiced by a sale, noting that after a sale the nondebtor spouse would be in almost the same position she was in prior to the sale. She "would still be employed on a part-time basis, still be dependent on support and alimony from the debtor, and have at least $20,000 toward the purchase of a new home."

In a similar analysis under §363(h), the court noted that it was to consider economic and emotional detriment in considering whether the detriment to the nondebtor spouse would outweigh the benefit to the estate. The only noneconomic factor noted by the court was the fact that the nondebtor spouse would "experience some hardship in relocating." The court found that this was not enough to outweigh the substantial benefit to the estate of approximately $12,500 and authorized the sale under §363(h).

The trustee in In re Jackson, 2003 Bankr. LEXIS 953 (Bankr. D. N.H.), sought to sell a single-family residence jointly owned by the debtor and his nondebtor spouse. The trustee had obtained a purchase agreement with a third-party buyer at a selling price of $1.225 million. In analyzing the propriety of a sale under §363(h), the court noted that §363(h)(3) "would be meaningless unless the court is required to consider noneconomic factors in the balancing test." The court noted that this balancing test is a "fact-sensitive analysis that is decided on a case-by-case basis."

In considering the benefit to the estate, the court noted that the estate's interest in the proceeds, free of the nondebtor co-owner's interest, would "constitute at least a material portion, and perhaps substantially all, of any distribution to creditors." The nondebtor's spouse testified that a forced sale of her home would "be devastating to her." She also noted that after the expenses from the sale were paid out of the proceeds from the sale, she would not be able to purchase a suitable home in the same area, which would force her to move from the community where she had lived for more than two decades. The court did not find this argument persuasive, noting that to remain in the property the debtor and the nondebtor spouse would be required to pay mortgage and property taxes totaling $6,159.48 per month. The court found further that the debtor and the nondebtor spouse would receive a lump-sum payment of at least $238,000 from the sale of the property with which to find replacement housing. The court found that although there would undoubtedly be emotional detriment from the sale of the long-term home, this harm was outweighed by the benefit to the estate from the sale of the property.

Cases Denying Approval

In In re Gauthreaux, 206 B.R. 502 (Bankr. N.D. Ill. 1997), the debtor, Linda Gauthreaux, and Isaac Hendricks owned property as joint tenants. Although Mr. Hendricks purchased the property alone in 1986 and made the down payment of approximately $1,000, he and the debtor held title jointly. The debtor never made any payments on the property and lived in the property from the time of its purchase until late 1989 or early 1990. The debtor filed under chapter 7 in November 1995. The trustee moved to sell the property under §363(h).

The court found that the sale of the property could potentially net $21,350 for the bankruptcy estate prior to application of capital gains tax and administrative expenses. This same amount could result for the co-owner. This was found to "'constitute' a substantial benefit to the estate."

In weighing the benefits of the estate against the detriment to the nondebtor co-owner, the court found the detriment to be "severe":

• The nondebtor co-owner would not be able to obtain financing to enable him to exercise his right of first refusal under §363(i).
• There were no assurances that the sale share to the nondebtor co-owner would be enough to purchase a new home.
• The co-owner would be losing a good portion of the contributions and payments that he made toward acquisition, maintenance and retention of that property.
• the sale would have an adverse impact on the co-owner because he would no longer be able to deduct real estate taxes and interest payments on the property if he were forced to sell this home and rent a new home.
• The loss of this house would cause the co-owner irreparable harm by seriously diminishing the quality of his life.

In In re McCoy, 92 B.R. 750 (Bankr. N.D. Ohio 1988), prior to filing under chapter 7, the debtors transferred their interest in certain real estate to Jacqueline Anderson, a person for whose estate the debtor had been appointed the legal guardian. The trustee sought to sell the property under §363(h). The court in this case reaffirmed the doctrine of In re Persky, 78 B.R. 657 (Bankr. E.D.N.Y. 1987), which held that in balancing the estate's benefit against the detriment to the co-owner, the court should consider "not only economic detriment, but also psychological, emotional and even physical detriment." In this case, the nondebtor co-owner was an individual who had been adjudicated mentally incompetent. The court considered the psychological and emotional detriment that would be suffered by a person in the nondebtor co-owner's position and found that the sale should not be authorized because the detriment to the co-owner outweighed the benefit to the estate. The court also considered the economic detriment in finding that the proceeds from the sale, if any, would not be sufficient to allow her to purchase an alternative residence. Finally, the court found further detriment to the co-owner because the property was owned free and clear of any encumbrances. The court found that the hardship of rental or mortgage payments would outweigh any benefit to the estate.

In re Persky, 893 F.2d 15 (2d Cir. 1989), is a seminal case regarding the consideration by courts of noneconomic factors when weighing the detriment to the nondebtor co-owner in a proposed sale under §363(h). The debtor and his nondebtor wife owned a residence as tenants by the entirety. The bankruptcy court considered only whether sale of the wife's survivorship interests in the property benefitted the estate. On appeal, the Second Circuit held, however, that the benefit to the estate should be viewed in terms of the sale of the wife's entire interest in the property, including the present possessory and survivorship interests. More importantly, the appellate court held that §363(h)'s balancing test should also consider noneconomic factors in considering the detriment to the nondebtor co-owner. In a nonexhaustive list, the court listed several variables that should be considered for valuing the respective interest, including "actuarial calculations of the life expectancies of the spouses, respective contributions to the purchase price of the home, tax exemptions available on the property, prospects for acquiring a new home, special physical or mental handicaps, and minor children living at home." Id. The court also cited United States v. Rodgers, 461 U.S. 677 (1983), for the quote, "we are not blind to the fact that in practical terms financial compensation may not always be a completely adequate substitute for a roof over one's head." Rogers, 461 U.S. at 703-04.

In In re Waxman, 128 B.R. 49 (Bankr. E.D.N.Y. 1991), the debtor and his nondebtor spouse owned their marital residence as tenants by the entirety. In weighing the detriment to the nondebtor spouse against the benefit to the estate in a sale under §363(h), the court considered the property's location in an Orthodox Jewish community. The court found that the noneconomic detriment of forcing the nondebtor spouse to surrender her home of 27 years, which was within walking distance of her synagogue, outweighed any benefit to the estate, thereby blocking any sale under §363(h).

The District Court in In re Marks, 2001 U.S. Dist. LEXIS 11478 (E.D. Pa. 2001), was required to reconcile §363(h) with a state law that exempted property held by spouses in a tenancy by the entirety from creditors of a bankrupt spouse. The court found that §363(h) could not apply without eviscerating the entire notion of a tenancy by the entirety. Accordingly, the court did not allow the trustee to proceed with the sale.

In re Spain, 85 B.R. 874 (Bankr. N.D. Ala. 1988), is a case where the court considered both economic and noneconomic factors in denying a proposed sale under §363(h). The court found that the economic benefit to the estate would be nominal because the lack of a ready purchaser would result in high costs from attorneys' fees and real estate commissions. The court also considered "the psychological and emotional damage to the family by the loss of the home" and determined that neither the debtor, his spouse or their children would "want to suffer the trauma of being torn from the home."

In In re Ray, 73 B.R. 544 (Bankr. N.D. Ga. 1987), the court found that no benefit to the estate would result because sale proceeds after satisfying outstanding liens on the property would result in insufficient recovery for plaintiff's creditors. The court also found that the nondebtor co-owner had farmed that land for many years and would be forced to quit farming and have his finances adversely affected. The court found that this detriment outweighed whatever insignificant benefit might result to the estate from a sale of the land.

In In re Trout, 146 B.R. 823 (Bankr. D. N.D. 1992), the nondebtor co-owner was the divorced spouse of the debtor and the exclusive resident of the property that was the subject of trustee's proposed §363(h) sale. The court found that because of the nondebtor co-owner's age and length of time as a resident on the property, she "likely...intend[ed] to live out her golden years there." The court found that forcing the nondebtor co-owner out of the home at this point "would certainly cause [her] severe emotional and psychological damage." The court also cited the Rogers quote noted above in In re Persky ("in practical terms, pecuniary compensation may not always be a completely suitable substitute for the assurance of having a roof over one's head"). Finally, the court found that because of the spouse's age and lack of substantial steady income, she would unlikely be able to obtain suitable financing to exercise her right of first refusal under §363(i), and the detriments to the spouse outweighed the benefit to the estate.

Footnotes

¹ The author would like to acknowledge the valuable assistance of Gary Goudelock, an associate attorney with the firm, in the preparation of this article. Return to article